Excise Tax

An excise tax is a sales tax levied on a particular good or service while sales tax covers all commodities that enter consumption. For example, Indian government imposes excise tax on cigarettes and liquor. In addition to providing revenues, excise taxes are sometimes imposed on certain goods like liquor to decrease their consumption. Similarly, taxes are imposed on goods like petrol to decrease their consumption and save them. Sometimes excise duties can be imposed during war or inflationary periods to curtail the use of scarce goods.

The imposition of excise tax may lead to a reduction in supply that will shift the burden of tax on the consumer with an increase in price. Generally an excise tax is not borne equally by consumers and sellers. The incidence of tax distributed between the two parties depends on the elasticity of demand and supply of the product.  Thus the price increases by the full amount of the tax change.

We can conclude the influence of elasticity of demand on shifting tax burden as follows:

(a)     If demand is perfectly elastic, the whole incidence-will be on the seller.

(b)     If the demand is perfectly inelastic, the whole incidence will be on the buyer.

(c)     The greater the elasticity of demand, the greater will be the incidence on the seller.

(d)     The greater the inelasticity of demand, the greater will be the incidence on the consumer.

Thus, if managers-have information on elasticites of supply and demand, they will be able to anticipate the effects of changes in excise tax policies and plan accordingly. Although precise estimates of elasticities are not always available, even a rough guess can aid managers in making pricing decisions in response to changes in taxes. 

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